A New ETF Avenue For EM Sovereign Debt

Emerging markets sovereign debt is one of this year's best-performing asset classes, a trend that is benefiting an array of exchange-traded funds. Some ETF issuers are seizing upon that theme by bringing new products to market, as highlighted by Thursday's debut of the VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (EGA Emerging Global Shares Trust IGEM).

New ETF

The new ETF tracks the J.P. Morgan Custom EM Investment Grade Plus BB-Rated Sovereign USD Bond Index (JPEGIGBB), “which is comprised primarily of investment grade U.S. dollar-denominated bonds issued by emerging markets (EM) governments,” according to VanEck.

As a dollar-denominated ETF, the IGEM limits investors' exposure to volatile emerging markets currencies. IGEM has other advantages, particularly at a time of dollar weakness and still low U.S. interest rates.

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Emerging markets governments and some corporations binge borrowed in dollars during the various versions of the Fed's quantitative easing programs. It looked smart, as the dollar weakened against a plethora of developed and emerging currencies, but those emerging markets borrowers were caught off guard when the dollar started soaring several years ago.

Global Elements

Mexico is IGEM's largest country weight at 8.9 percent, followed by Turkey, the Philippines and Indonesia, each with weights of about 6.7 percent. Indonesia, Southeast Asia's largest economy, is home to some of the best-performing debt in the emerging world this year. Colombia and Poland each account for more than 5 percent of IGEM's geographic lineup.

“With global bond yields reaching new lows, and an increasing amount of negative yielding government bonds, investors have turned to higher yielding asset classes to add income to their portfolios. However, investors must balance the incremental yield achieved with the additional risks associated with these investments, such as credit or currency risk,” according to VanEck.

IGEM has an effective duration of nearly eight years, with a yield-to-worst of 3.4 percent. The new ETF charges 0.4 percent per year, or $40 for each $10,000 invested.

Other Names

VanEck's other emerging markets bond ETFs include the Market Vectors Emerging Mkts Local ETF EMLC and the Market Vectors ETF Trust HYEM.

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